Finance, central bank officials back strong US dollar
NEW YORK, June 9 (Reuters) – Finance ministry and central bank officials around the world on Monday again expressed worries about the U.S. dollar’s weakness in the past year, boosting the prospects that U.S. monetary authorities may step in to support the greenback.
U.S. Treasury Secretary Henry Paulson kicked off Monday’s chorus to support the dollar saying he was not ruling out intervening in the foreign exchange market to stabilize the U.S. currency.
“I would never take intervention off the table or any policy tool off the table.” Paulson said in an interview with CNBC television. “I just can’t speculate about what we will or won’t do.”
Paulson’s comments boosted the dollar across the board on Monday, pushing the euro down 1.0 percent against the dollar at $1.5620 .
The U.S. Treasury Secretary’s statements on the dollar were reinforced separately by New York Federal Reserve Bank President Timothy Geithner, who told the New York Economic Club that no central bank can be indifferent to its currency’s value.
Their remarks came a few days after similar comments from Fed Chairman Ben Bernanke, who expressed concern about the inflationary impact of a weak dollar through higher import prices.
“The dollar is important to us not just because of the effect it has on growth and inflation here and around the world but it’s important because of the very important role the dollar plays in the international financial system,” Geithner said.
“As a result, as you would expect, we pay very close attention to what happens in exchange markets,” he added.
Dallas Fed President Richard Fisher also left the threat of currency intervention open, saying a weak currency can create a “negative feedback loop” that can spur inflation and sap growth.”
Coordinated intervention, however, has been rare since the 1985 Plaza Accord, when central banks in Europe, Japan, and North America stepped in to weaken the dollar, and the 1987 Louvre accord when the Group of Seven countries tried to support the greenback.
Japan sold some 35 trillion yen in 2003 and 2004 to slow the yen’s rise but has not intervened since.
In recent years, the Fed and the European Central Bank have been more reticient, though both acted with Japan to prop up the euro in 2000 when it hit a record low US$0.8225, 30 percent below its value at inception in 1999.
SOME ANALYSTS SAY INTERVENTION UNLIKELY
Most analysts are not convinced central banks are prepared to support a weakening dollar, although that could change if inflation risies, investors were to shun U.S. assets, and a sluggish U.S. economy starts to drag world economic growth lower.
“That intervention cannot be ruled out does not mean Paulson will authorize intervention. Far from it,” said Marc Chandler, global head of FX strategy, at Brown Brothers Harriman in New York.
“U.S. dollar weakness is not adversely impacting US assets — bonds and stocks have been outperforming most (though not all) of the major markets and emerging markets. It is true that imported inflation is elevated, but energy accounts for the bulk of this,” he added.
China also chimed in on the U.S. dollar, saying the United States must take quick action to stabilize its currency because its recent weakness is hurting developing counties.
China’s ambassador to the World Trade Organisation (WTO) Sun Zhenyu said falling U.S. interest rates and an expansionary fiscal policy to counter the effects of the U.S. housing market slump had led to continued dollar depreciation, aggravated worldwide inflationary pressures, and increases in oil and food prices.
Across the Atlantic, ECB President Jean-Claude Trichet on Monday reiterated the ECB’s signal it may raise euro zone interest rates to quell persistent inflation pressure, but he noted the statements by U.S. financial authorities on the dollar.
The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits ballooned, but fears of an American recession and a global credit crisis have sent the dollar to its lowest levels in a generation.
The dollar this year has fallen to a record low at $1.6018 per euro. It has recovered since then versus the euro, but it was still more than 30 percent lower from the euro’s initial laynch rate in 1999.
(Additional reporting by Glen Somerville, Alister Bull, Burton Frierson, Jonathan Lynn and Krista Hughes in Frankfurt)
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